Are we seeing a shift in companies' social purpose?

Phil Vernon

— 1 minute read

09 April 2018

Since BlackRock CEO Larry Fink wrote his annual letter to CEOs about the social purpose of companies, there has been overwhelming evidence of shifts in community expectations of businesses, writes Australian Ethical's Phil Vernon.

For over 30 years, Australian Ethical has been advocating for a better financial system – one in which financial outcomes are achieved while being conscious of their impact on the world around us.

We advocate this because the alternative is unimaginable. A system based purely on maximising profits and returns without regard to their social and environmental impact paints a bleak and dystopian future.

This is particularly relevant, as businesses are increasingly having the most impact in protecting the future of our planet and shaping the future of our society.

So a new model is needed, one with empathy at its core and one in which business leaders are the stewards of our future as much as our politicians.

Closer to home, comments from the recent Australian Institute of Company Directors conference focused on similar themes.

Dr Ken Henry, Chairman of NAB, gave a speech advocating “getting really serious about the social purpose of business”.

And more than just rhetoric, we’ve seen action. Following the school shooting in Parkland Florida, the business community responded independently of government, by applying their own restrictions on gun sales, distancing themselves from the National Rifle Association and removing discounts for its members.

The evidence of increasing community expectations from businesses is overwhelming.

Recent results of the Edelman Trust Barometer showed a deterioration of trust in all institutions in Australia (government, NGOs, businesses and media).

Most critically though, 65% of those surveyed want businesses to take the lead on change and not wait for the government to impose it on them.

This expectation will only accelerate over time. Seventy-two per cent of Millennials have an expectation that businesses are a force for positive social change, according to Deloitte, and this age group will comprise 75% of the workforce by 2025, according to the UBS.

The shift in expectations is translating into a real shift in the allocation of capital, with nearly half (44%) of Australia’s investments now being invested through some form of responsible investment strategy, according to the RIAA’s 2017 Responsible Investment Benchmark Report.

In the case of Australian Ethical, we were the fastest-growing superannuation fund last year, having tripled our funds in just over three years to $2.6 billion.

Discussion of the social responsibility of businesses inevitably comes with the usual objections that the sole purpose of businesses is to maximise profits, and that business leaders have no business speaking out on social issues.

We saw this commentary recently during the marriage equality debate in our country and from Warren Buffett in the context of the gun debate in the US.

But these voices are sounding increasingly out of touch.

Our business leaders are important stewards of our future. We need to know how they think, so that we can make conscious choices in our interactions with them and ensure they align with our values.

As consumers, we want to know that the product we buy has not been created by damaging the planet or exploiting human rights.

As employees, the culture of an organization is a critical factor in deciding how we want to earn our livelihood. And as investors, before we provide our hard earned capital for them to allocate, we want to know where it is going.

But business leaders' obligation is broader than that. Well-functioning democracies rely on open, constructive discussion of the issues of the day to help shape the society we wish to create.

These voices need to include a cross-section of our society - politicians, journalists, civil society leaders – and business leaders.

We want our leaders to think and act with empathy, conscious of the impact of their actions on the world around them. We want them to not only do this in a reactive sense but to pro-actively care.

We want them to embrace responsibility for their actions, and this means they need to have an opinion and express their views.

Gone are the days when we need to justify being ethical only if it fits a commercial agenda. The Parkland Shooting showed the dangers of this.

Companies responding to consumer pressure found there was no neutral ground. Such a decision is not a commercial one, but should be based on what the organisation considers is right.

This is often accused as being too subjective or too hard to measure. Yes, it’s hard; having a framework for thinking about it is critical. But it needs to be done.

Authentically purpose-aligned businesses lead to far greater engagement among staff. A focus on profits only and self-interest leads to gaming. Is it any wonder we have a Royal Commission?

And so are we optimistic about these trends?

Words are easy. Actions are what matters.

It’s easy to be cynical. Many organisations will adopt the social licence rhetoric and continue to behave in ways that support unethical businesses.

And far bolder action is needed particularly where the protection of the environment and climate change are concerned.

Mr Fink and Mr Henry each run businesses that continue to allocate capital to organisations that fall outside their definition of meeting community expectations.

But the significance of their statements and similar ones by others cannot be overstated. The tone is a shift from the old ESG/CSR perspective of considering ethical issues only if they can be quantified as a financial risk or opportunity.

They are saying leaders have not just the permission but the obligation to consider them in their own right.

And when the largest-asset manager in the world nudges the entire corporate sector to think differently, a shift is inevitable.

The days where businesses are concerned purely for profit are long gone. We need to move beyond the debate as to whether businesses have a social purpose and onto how it will be exercised.

Businesses have the permission and the power to act. They need to do so.

Phil Vernon is the chief executive and managing director of Australian Ethical.